Establishing a limited liability company (LLC) correctly is a crucial step in setting up your business. An LLC provides liability protection and offers various benefits. This manual outlines seven steps to help you launch an LLC.
Understanding an LLC
An LLC is a legal structure that U.S. business owners can choose for their operations. It safeguards personal assets in cases of legal challenges or bankruptcy and offers flexible tax options, allowing for taxation as either a sole proprietorship or a corporation. Consulting a tax advisor will help determine the best taxation route for your LLC.
Steps to form an LLC
Follow this seven-step guide to form an LLC, bearing in mind that laws and procedures vary by state.
Choose a business name
While branding is important when selecting a business name, it must comply with state law requirements. Typically, state laws prohibit using a name that’s already taken by another company within your state and restrict certain terms like “insurance” or “banking.”
Your business name will likely need to include “LLC” or “limited liability company.” Check your state’s naming regulations and verify the availability of your desired name on the state business filing agency’s website, usually the Secretary of State.
Appoint a registered agent
All states mandate LLCs to appoint a registered agent, who receives and forwards official and legal documents to the LLC. Anyone over 18 can serve as a registered agent, including yourself or an employee, provided they are available during business hours at a state-based address.
Alternatively, you can hire a registered dealer service, which typically costs over a hundred dollars annually.
Should you be your own registered agent?
While legally permissible, acting as your own registered agent may not be ideal for everyone. This role requires handling critical legal documents and exposes your name and address to public records. If you’re not familiar with local laws or managing such paperwork, it might be advisable to engage a professional, despite the cost.
Consider consulting a lawyer or professional agency before deciding.
Obtain your state’s llc articles of organization form
To legally establish your LLC, you need to file the necessary paperwork with the state business filing agency. This document, often called the articles of organization or certificate of formation, varies by state. Find your state’s form on the same website used for business phrase research.
Prepare the LLC articles of organization form
Each state has its own specific requirements and procedures for forming an LLC. Essential information you’ll need to provide includes:
- Your business name.
- The address of your principal place of business.
- The purpose of the business.
- The management structure of your LLC.
- Contact information for the registered agent (and in some states, the agent’s signature).
- The duration of the LLC.
Once these details are prepared, one or more business owners or organizers must sign the form. In some states, like Nebraska and New York, you are required to publish a notice in a newspaper declaring your intent to register your LLC. This must be done prior to filing the articles of organization.
File the articles of organization
Review your articles of organization thoroughly before offering them to your state. You’ll also require to pay a filing fee, which varies by state. Once your formation documents are approved, the state will issue a certificate confirming your LLC’s formal registration.
This certificate is necessary for tasks such as setting up a company bank account and obtaining a tax ID number.
Create an operating agreement
An operational agreement outlines the financial, legal, and management rights of all LLC members. It should detail profit distribution, member exit protocols, and capital contributions.
While many states don’t mandate an operating agreement, drafting one is wise, especially for LLCs with multiple members, to ensure all parties agree on their rights and responsibilities. Even solo owners benefit from having detailed documentation.
Creating an operating agreement yourself is feasible, particularly for single-member LLCs, and plenty of free templates are available online. For more complex scenarios, such as LLCs with multiple owners, hiring an experienced attorney can be a worthwhile investment.
Keep your LLCactive
Setting up your LLC is just the beginning. To keep your business in good standing, refer to your state’s business filing website for the latest compliance requirements. You may need to file an annual report and pay an annual fee to update your LLC’s information.
Key tasks for establishing an LLC
Beyond knowing how to form an LLC, attending to several crucial tasks can significantly influence your new entity’s success or fulfill additional operational requirements.
Secure business licenses and permits
Beyond the documents needed to establish your LLC, you’ll likely need to complete forms and pay fees related to business licenses and permits. This information is usually accessible from the same office or on the official website, among the list of business forms and fee schedules.
Verify the specific licenses and fees required to legally operate in your state. Keep track of important deadlines, as renewing licenses or permits is typically necessary. Missing renewal deadlines could jeopardize your LLC’s legal standing.
Obtain an employer identification number (EIN)
Securing an EIN is essential when starting an LLC. It is a key step in distinguishing your business entity and assets from personal finances. Banks often require an EIN to open a business account for your LLC, and certain businesses must have one by law. Obtain your EIN as soon as you set up your company.
Separate business and personal assets
As noted, certain actions help differentiate personal assets from those linked to your business. Having an EIN and a separate business bank account are foundational steps in this process.
A common concern among LLC owners is how to draw income from their business. Generally, this involves making withdrawals from the LLC’s business account, termed as an “owner’s draw.” This method allows you to treat yourself as an employee compensated by the business, avoiding complications related to using company funds for personal expenses.
Register your business in other states
You can register your business in multiple states, and the state you select as your domestic entity doesn’t have to be where you reside. You can establish an out-of-state entity if you have a registered agent in that state.
To create a foreign LLC, start by establishing your business in one state. For example, if you initially incorporated your LLC in Delaware but want to operate in Texas, you must present Form 304 for Registration of a Foreign Limited Liability Company to the Texas Secretary of State.
Often, a certificate of good standing and other documentation is also required to facilitate registration in additional states.